MuniLand: Is Detroit the Next Brooklyn? Syncora and Water/Waste Water Settlements Reached

The City of Detroit’s bankruptcy is swiftly moving ahead, and recent testimony from a city advisor in the trial sees “Detroit as the next Brooklyn.”  No one can predict if Detroit will follow the success of the post 1970s state takeover of NY City and subsequent boom in the Brooklyn borough.  But two recent events – the water and wastewater utility spinoff to a separate regional entity and a settlement with bond insurer Syncora – are providing Detroit with a clean slate.  First, a deal was reached between Detroit and three surrounding counties to form a new regional water and wastewater spinoff called the Great Lakes Water Authority.  The Authority will be responsible for supplying clean water and sewer services to nearly 40% of Michigan’s population.  As part of the deal, water rates will increase no more than 4% a year for the next 10 years and the City of Detroit Water and Sewerage Department will receive a $50 million annual lease payment.  Conditions of the lease payment were a significant hurdle to overcome.  The deal stipulates the lease payment cannot be used for general fund purposes, but solely for the upgrade and maintenance of Detroit’s water and sewer system.  It remains unclear how existing pension obligations will be paid, which, in combination with weak operating metrics, forms the two major reasons we are still staying away from the credit.  Second, bond insurer Syncora settled with Detroit for 26 cents on the dollar, up from an initially proposed 10 cents on the dollar.  The non-cash deal gives Syncora a long term lease on centrally located parking garages, a lease to run the U.S. side Detroit-Windsor Tunnel and credits to purchase parcels of land in the future.  The settlement keeps in place the “grand bargain,” which is important to credit analysis because it makes pension obligations senior to general obligation bondholders.  The swiftness of the bankruptcy proceeding is remarkable. It provides Detroit with a new beginning, and just maybe an outside chance of becoming the next Brooklyn.